1. Introduction

The objective of this report is to analyse South African Breweries (SAB) by explaining it’s current strategic position in the year 2001, identifying and evaluating these strategic option. Furthermore to produce a recommendation for future strategic implementation.

2. Strategic Competencies and Capabilities

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This section is involved with analysing SAB’s strategic competencies within the internal environment and capabilities within the macro-environment by producing a SWOT analysis1.

2.1 Strengths

In 2001, SAB was the fifth largest brewing organisation in the global market place operating throughout 21 various countries. This was accomplished by SAB entering domestic and international markets that previously consisted of highly fragmented, small scale and local breweries.

SAB’s brand portfolio was extremely diverse ranging from imported alcoholic beverages such as established brands: Heineken and Amstel to national brands including Castle lager. The brand portfolio provides an enhanced marketing proposition, increases total sales and delivers economies of scale in production and distribution.

SAB’s core competencies were focused towards emerging market economies through asset utilisation, cost management, and by delivering a portfolio consisting of high quality and low cost products.

2.2 Weaknesses / Threats

Although SAB had successfully created opportunities in the less developed world, they had not attempted to establish themselves in developed countries where strong competition already exists, this evident in places like Shanghai and Beijing. These developed markets had established brands.

Declining beer volumes in South Africa at an annualised rate of approximately 4% indicates that the overall market size is steadily decreasing due to consumer spending in beer being diverted to other markets such as the cellular phone market, as the major age group ranges between 20-29. This age group is the major beer consumer.

In South Africa the average individual spending on beer has decreased in relation to other spending patterns. Local people are spending more money improving their lifestyles as opposed to self-fulfilment. Spending patterns have shifted to payment of mortgages and education as higher standard of living is encouraged.

SAB’s inability to establish the Castle brand, as either a premium beer such as Heineken and Amstel or non-premium beer such as Sorghum as it is cheaper, has left the brand in an unclear and vulnerable position. This is all in relation to inefficient brand differentiation.

The long-term threat of the HIV and AIDS spreading throughout South Africa meant that SAB would lose the value of sales associated with their specifically targeted segment of the market, which predominantly comprised of young adults. This was forecasted by the World Health Organisation who predicted an increase in the infected population form 9% to 30% by 2010.

Harsh climate conditions such as torrential rain that caused floods in 2000, threaten the volume of sales within the market through the deterrence of outdoor social activities that represent a large proportion of the overall sales.

The increased possibility of the rise in costs associated directly with the production could result in a cascading effect on the price of the final product delivered to the consumer therefore having an adverse effect on the company’s performance.

2.3 Opportunities

A stable macro-environment in South Africa has a causal relation with the shift of consumer expenditure. A low inflation rate due to higher employment has given the opportunity for individuals to improve their capital, increasing their spending capacity.

SAB’s main opportunity to grow would be in the Chinese Market being the second largest in the world in terms of consumption, growing at a 10% per annum where it is forecasted to become the largest market. SAB already holds a fair market share in the regions where it operates. The Chinese market is full of opportunities to grow where SAB has thorough investment plans. In relation to the Boston Matrix2 this would be a star market, where there is high market growth and high market share.

SAB’s percentage share in the liquor market is in the region of 50%. It has the ability to be increased by improving their distribution, promotion, and through better channel segmentation, where the main aim is to establish beer as the number one choice for alcoholic drinks.

In the Eastern European market SABI acquired Pilsner Urquell the major brewer in the Czech Republic, this gave it a high premium brand, as well as other major brands, providing it a large market share. Opportunities arise as they can cut costs and increase capacity. By this export opportunities will improve, as these brands are particular favourites in North America and Germany.

3. Business Environment

To measure the business environment for SAB it is very important to consider factors included in the PEST analysis.

3.1 Political

Business guidelines are highly influenced by political grounds. SAB has to consider the stability of the political environment in those countries where it operates. SAB has to consider that some markets are market economies and others are command economies, where government influence comes at different levels. In cases of large government intervention SAB must consider government influence in laws that regulate or tax the business.

Furthermore SAB has many factors to consider such as governments policy on the economy and its views on culture and religion for instance in countries where alcohol is a taboo. Expansion in African countries were there is a Muslim majority might be harder to enter.

3.2 Economic

SAB has to consider major factors that influence the market as a whole. SAB must consider many factors such as the weakness of the South African Rand against other currencies, which could produce volatility in interest rates. Other factors that must be considered include the inflation rate and the employment level per capita in operational countries.

SAB also has to consider factors such as the long-term prospects for the economies Gross Domestic Product (GDP) per capita, by this it can have different beers.

3.3 Socio-Cultural

There are social and cultural that effect SAB from country to country. It is important for the organisation to consider such factors. They must consider the dominant religion in the region or country they want to operate in. The attitude of people to foreign products and services that the company wants to offer, whether these will be accepted. Factors such as the life expectancy of people, SAB fears the death of people from the AIDS epidemic in Africa. Levels of education and health awareness are becoming more prominent and effect the consumption of beer.

3.4 Technological

A major motivator for gaining competitive advantage, in the global markets is the increase in technological developments.

SAB have expanded to a new brewery in Port Elisabeth, the largest and fastest in the world with an estimated production capacity of 62,500 litres a day processing for 24 hours. This advance in technology provides them with a competitive advantage.

Technological advances in facilities like the Alrode brewery would provide 8.2 hectolitres of capacity a year.

For a more comprehensive analysis of the business environment a PESTEL analysis would be needed3, where the main points of such an analysis is outlined.

4. Stakeholder Expectation

4.1 Government

Governments are interested in attracting direct foreign investment into the country, in order to add structure to the economy through creating new jobs thus resulting in the reduction of unemployment levels.

Some countries require a high degree of sensitivity when entering into partnership with local breweries as ownership becomes shared with a multinational corporation and employees may feel their jobs becoming threatened, and also SAB should take time and careful consideration of cultural issues that may cause upset within local communities.

4.2 Shareholders

Shareholders expect the company to achieve operational excellence in order to meet their expectations, which consist of dividends and return of capital employed. An annual report detailing the performance of the company and strategies that the company seeks to execute for the future is also expected. As the company had made previous losses on the London Stock Exchange,

4.3 Directors

Directors hope to achieve a dominant position on the global market and a well-established position on the LSE in order to satisfy the shareholders expectations.

4.4 Consumers

Consumers expect products which, are value for money and are consistent in quality and brand. They also require a wide range of products to satisfy each person’s individual taste.

4.5 Competitors

The action of SAB’s competitors indirectly effects it in terms of products they offer and the quality. The competitors might offer higher quality products for lower prices. Competitors such as Heineken and Amstel are higher premium beers in areas such as China as previously stated.

5. Strategic options available to SAB

South African breweries are much commercialised and have a sound background with many different locations in Africa. This can be seen a good strategic option because they have a good market share. High share businesses have higher sales ratio largely because they are better placed to exploit innovation.

Castle beer is one of the well-known South African brands, which is used to gain market share without extra marketing costs.

“SABI is currently pursing a strategy to make Castle larger the first pan-Africa beer.4”

SAB is a strong believer in growth potential. They are looking to invest in the country itself with low per capita beer consumption. The advantages would be to promote Castle beer as a beverage where the market share of its consumption in relation to other beverages is low.

SAB have the opportunity to advertise in popular well-developed beer markets in the world, which will continue further to increase market share and growth.

China makes up a large part of Asia’s beer market. This has been successful as beer volumes have risen by more than double between 1997 and 2000 by 5,374,000 from 3,055,000 in 1997 which shows a significant rise in comparison to SABI Africa and Europe. SAB wants to expand operations in China to attain potential long-term growth especially in areas of high competition where premium brands are needed. In this sort of market they can gain low cost of production through the cheap labour available for the brewing of their beer. Therefore enabling SAB to maximise its profits.

Similarly SAB wants to carry on investing in Polish and East European operations. Poland’s beer volume has increased by 352% from 1997 to 20005. The greater the level of investment, the higher the rate of growth in the future.

SABIE’s strategy involves investment in countries which were previously government led moving to market economies since production is controlled by consumers and not the government.

Countries such as Russia where beer is popular although there is no local well-established brand come to great importance to SAB.

SAB has diversified into other markets apart from the brewing through the expansion of hotels and casinos.

6. Recommended strategy for SAB

While the global brewing industry remained highly fragmented, companies tried to merge or acquire others. Brewers were under pressure to move quickly to acquire, or else they might be acquired themselves. Despite SAB’s movement overseas, the company was primarily an emerging market brewer, and closely associated with South Africa – an economy out of favour at the time.

The company could try to merge with a major developed country brewer, one that would complement SAB’s competencies and geographical strengths. This tactic could be used to make SAB reach to the top league of premier international brewers.

Alternatively SAB could find a large emerging market brewer to acquire.

Thirdly, SAB could continue to focus on emerging market growth opportunities by building critical mass and rounding out its portfolio, possibly staging small acquisitions when opportunities arose. SAB would then wait for the cycle of poor political risk to turn, and for emerging markets to return to favour before considering growth options in developed countries.

Whilst western European markets are mature and highly competitive, eastern European beer market would provide SAB with opportunities to gain a larger market share, use the skills in productions and sales and distribution, and to build a sensible operation in Europe over time, since Eastern Europe would be part of Europe in the long run. SAB should try to acquire a strong brand in Western Europe were it has little market share. This would provide them with better results in the LSE, as the company is not well known in this area.

SAB identified its competitive advantage in the company’s ability to sustain and improve in two areas: value adding capability and cost leadership. In accordance with this aim, SABI should target specific areas on which to focus.

These areas consist of maintaining and enhancing product quality and brand equity; by this the company portfolio will remain strong and it will be known throughout the countries it operates in. Consumers have brand loyalty therefore if the SAB remains strong by name and quality; customers will not switch to competing brands.

SAB should also strengthen new product development capabilities. They should develop new brands for premium beers and non-premium beers depending on competition, growth potential and consumers’ disposable income.

Finally, SAB has the ability to pursue differentiated customer service. By this SAB needs to be involved in different markets where income, customs and traditions of local customers play a large role. The change in consumer buying patterns should be taken into account.

Bibliography

Johnson, G. and Scholes, K. 2002. Exploring Corporate Strategy: Text and Cases,

6th edition, Pearson Education.

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